Indiana Department of Financial Institutions

Following are some of the most frequently asked questions and their answers.

Budgeting

Q: I'd like to have a budget, but creating one seems overwhelming. How do I begin?

A: Creating a budget is the first step in managing your finances more responsibly. Budgeting helps you track how you spend your money. You can use the information to decide how to spend your money and to set some basic financial goals, such as saving more and spending less.

Gather you bank or credit union statements, canceled checks, and credit card statements to help you start the budget process. Categorize your expenses for two or three months so that you know what you are spending on housing-related expenses (including maintenance), credit payments, food and household necessities, clothing, transportation, and entertainment. Review the list and pinpoint any areas where you could save money. If you are covering your expenses but living from paycheck to paycheck, simply cutting down on non-essential food, clothing, and entertainment might be enough to begin to build savings.

Include some money in your budget for emergency savings in case you get sick or laid off from your job. You should have three to six months worth of income in your emergency fund.

Q: The cost of food, clothes, and other daily necessities is threatening to bury us in debt. How can we reduce these expenses?

A: The first step to financial recovery is reducing expenses and cutting unnecessary spending. Sit down with family members and explain that reducing your spending will benefit everyone in the household, but that some tough decisions and occasional sacrifices might have to be made. For instances, at the grocery store and pharmacy, buying generic items or in bulk can cut costs. When you need clothing, furniture, and cars, consider buying good-quality used items instead of new ones.

A: If you have already reduced your expenses and concluded that you need more income, you might want to consider:

A second job To help make ends meet, many people take on a second job. This can be a temporary solution.

A second income Can your spouse or teenager find a job to help increase the family's income. If your teenagers or other family members who live with you have jobs, ask them to contribute to living expenses. Or if your wife works, are you spending more then her income on child care, clothing, eating out more, etc.? You may be better off without the second income.

Improve your skills Consider taking a course that can make you more valuable in the job market and allow you to move to a better paying position.

Choices to Avoid

Q: Is there any reason I shouldn't take advantage of an offer that I've seen on TV to borrow money quickly with no credit check?

A: Many companies offer "quick money" to people in desperate circumstances. But these types of "quick credit" come with a high price tag. Yearly rates can exceed 1,000%. Do not enter into any loan without reading all of the fine print and asking what will happen if you can't pay the loan back as agreed.

Q: Is it advisable to take a cash advance on my credit card when I'm low on funds?

A: Borrowing money to cover day-to-day living expenses is not advisable. Credit card cash advances are usually subject to transaction fees, higher interest rates, and late charges. They are a convenient, but expensive way to borrow money. If you do have to make a cash advance, be sure to pay it off as quickly as possible and make more than the minimum payments. Making only minimum payments could result in taking as long as ten years to pay off the balance.

Q: I'm looking for money to consolidate my loans and do some home repairs. How can I make sure I'm getting a fair deal?

A: Shop around with several lenders, it's the best defense against fraud or unrealistic loan terms. Compare the terms offered by different types of lenders. Be sure that you can meet the new payments.

Co-Signing for Credit

Q: Should I co-sign a loan for a friend or relative?

A: Only you can decide the answer to this question. However, you should clearly understand the obligations of a co-signer. You are as responsible for making the payments as the person who actually takes out the loan. This is true even if you are not receiving the billing statements. If payments are not made on time, it will have a negative effect on your credit history.

In some states, creditors are prohibited from reporting delinquent payments on the so-signer's credit report unless the co-signer is notified that the payment is overdue.

Q: Is there any way I can know if a debt I co-signed is being paid on time?

A: As a co-signer, you will not receive the billing statements for the loan or credit card. At the time you sign, make sure you get the lender's name and other information about the credit account. Although the lender may not contact you unless the primary borrower defaults, you have the right to check with the lender that the account is current.

Credit

Q: What is credit?

A: Good credit is a valuable thing to have. It is the ability to borrow money or obtain goods by paying little or no money at the time of purchase. You promise to pay the original cost later or over time along with interest. (Interest is the cost you pay to borrow money or obtain goods over time.) Lenders want to be repaid so they usually lend only to people who show they've been reliable in repaying loans and credit.

Q: How does having good credit help me?

A: Good credit is a positive record of paying off loans and making timely payments. It can help you to buy a home, get a job, rent an apartment, borrow money, charge goods and services, finance a car, and take out an insurance policy. If you have good credit, you may be able to avoid cash deposits when you establish accounts with phone, electric, gas, heating oil, water and cable TV companies. Potential employers often use credit to check job candidates' backgrounds and as an indicator of an applicant's financial honesty and personal integrity.

Q: I messed up my credit a few years ago — what's the best way to get it back on track?

A: If you have a steady income and have lived in the same area for a year or more, try applying for credit with a local business. Or, if you have had a good relationship with your bank or credit union for several years, try applying for a credit card there. Make sure the information on your new credit account is being reported to one or more credit reporting agencies. Stay away from any company that guarantees to get you credit for an up-front fee.

Credit History

Q: What is a credit history?

A: Your credit history is a record of your payments on credit obligations such as credit cards, auto loans, student loans, and home mortgages. The records are gathered by a credit reporting agency. Lenders, landlords, insurance providers, employers, and others can contact these credit reporting agencies to see how you handle credit. Companies that have granted you credit or loaned you money supply the information about your accounts on a regular basis to the credit reporting agencies. Those facts make up your "credit report."

If you have never bought anything on credit or had a loan, you would not have a credit history. Those who have recently entered the work force or are new to this country may not have a credit history. Married persons whose credit transactions have been in the other spouse's name may not have a credit history.

Q: Is my credit history good or bad?

A: Whether your credit history is perceived as positive or negative depends on how reliable you have been in repaying loans or credit. If you have been reliable, you probably have a good credit history. If you have paid your bills late, abandoned debts without paying them off or filed for bankruptcy, you probably have a poor credit history. People who have damaged their credit usually find it harder to get loans and credit cards. (There are some companies that extend credit to people with poor credit, but the cost is generally much higher.)

Q: Does everyone have a credit history?

A: Many people do not have a credit history, such as people who have never had a loan or a credit card. People who recently entered the work force or are new to the country may not have credit histories. Married women who acquired credit under their husband's name may not have a credit history either.

Credit Scoring

Q: What is a credit score?

A: Credit scores (sometimes called risk scores) are formulas that lenders use to predict how you will use credit in the future. Different lenders use different formulas and most do not reveal what goes into them or how they are used in decision making.

These formulas may not be based on negative payment information alone. They may take into consideration how long you have lived in the same place or worked at the same job, how much total outstanding credit you have, the outstanding balances on your loans and credit cards and/or how much new credit you have acquired in the past few months.

Q: What is a FICO score?

A: There are many types of credit scores - one of the most common is developed by the Fair, Isaac Company, which calls them FICO scores. Depending on the credit reporting bureau, FICO scores are now as BEACON (Equifax), EMPIRICA (TransUnion) and the Experian/Fair, Isaac Risk Model. FICP scores are based on information in consumer credit reports maintained at one of these credit reporting agencies.

Your FICO score is not the only information lenders look at. They also look at the amount of debt you can handle in relation to your income, your employment history, and your credit history.

Insurance companies are now using FICO in underwriting their policies and premiums.

Q: Why did the credit reporting bureau give me a bad credit score?

A: Credit scores are not ratings provided by credit bureaus. Credit bureaus do not provide evaluations of or draw conclusions from the information in your credit report. The bureaus do not play a role in the decision of whether or not to loan you money, extend you credit, give you a job or rent you an apartment.

Q: How can I find out what my credit score is?

A: In 2001, one of the three largest credit bureaus, Equifax began offering a new online credit score service (approximately $13) on its web site. Along with your score, the company offers an explanation of how your score was arrived at and things you might do to improve it.

Establishing Good Credit

Q: How can I build a credit history?

A: It can take from six months to two years of on-time payments and responsible use of credit to build the kind of credit history most lenders consider reliable. Sometimes it is easier to try to get your first credit account close to home. Try a local lender, department store, or a credit union.

When trying to build a credit history, it's very important to find a lender that will report the payment record on your new credit account to one or more credit reporting agencies. If it's not reported, you won't establish a record for future lenders to see.

Q: How can I make sure I always have good credit?

A: Make good credit a top priority. Use credit responsibly. Pay your bills on time. Only borrow amounts you can comfortably repay. If because of illness or unemployment or other reasons, you are unable to pay your bills, contact your creditors at once and explain the problem. they may work with you to set up a new payment schedule you can meet until the crisis is over.

Q: Can fraud affect my good credit?

A: Yes. Although you are not liable for fraudulent use of your credit, it can take a lot of time to prove the charges are not yours and to remove the fraudulent items and the accounts from your credit history. To protect yourself before something bad happens:

don't keep all your credit cards in your wallet-store them in a secure place and just take them along when you need them.

do not give out credit card account information to people who call you on the telephone.

in a safe place, keep a list of all account numbers and your creditor's phone numbers so that you can report lost or stolen ATM and credit cards immediately. This will help you limit your liability for charges that you did not make and protect your good credit history.

be particularly careful about how you dispose of unwanted credit offers that come in the mail. Destroy the offers when you throw them away.

Q: Does your credit rating get better if you have more credit cards?

A: In most cases, no. Many people believe that your credit history improves as you acquire more credit cards. In fact, too much outstanding credit can work against you when you apply for other loans.

Finding Assistance

Q: Our debts are out of control — is there somewhere we can go for help?

A: Start by contacting your credit issuers to see if they will provide repayment assistance. You may also want to get help from a credit counselor. But, beware of companies that offer quick and easy solutions to your debt problems - there is no easy or quick fix to controlling debt.

Bankruptcy

Q: What is bankruptcy?

A: Bankruptcy is a legal proceeding that may eliminate your legal responsibility for your debts and allow you to get a fresh start. Bankruptcy laws provide an important safety net for people with very serious debt problems. Bankruptcy laws may vary from state to state.

Q: How can I decide whether or not to file for bankruptcy?

A: To assess if bankruptcy is right for you, ask whether or not it will discharge enough of your debts to make the entire process worthwhile. Dischargeable debts include back rent, utility bills, credit card bills, loans from friends and relatives, and legal, medical, and accounting bills. Also consider that you might have to give up certain property you would like to keep, such as a second home, collections of art, stamps, and coins, valuable family heirlooms, or furs and jewelry.

Bankruptcy is reported on your credit history for up to 10 years. If you are approved for credit after bankruptcy, you will likely be charged higher interest rates since you are considered a higher risk. Bankruptcy is also a matter of public record, so anyone who wants to look into your situation can do so.

Q: Do I need a lawyer to file for bankruptcy?

A: Bankruptcy laws are complex and it's probably a good idea to be represented by an attorney. Even if you decide to represent yourself, you should at least consult a bankruptcy attorney. A consultation should cost less than $100 and can help you understand the procedure and whether there are any difficult areas in your case. Bankruptcy petition preparers, who are paralegal workers, can prepare forms for you but are not allowed to give you legal advice. If you have a problem after the forms are filed, you won't have anyone to turn to.

Be aware that there are many bankruptcy-related scams that take advantage of people in financial trouble. Checkout lawyers before you hire them by calling your state or local bar association.

Women, Marriage, Divorce

Q: My husband and I have joint credit accounts. Should I have an account in my own name?

A: To make sure they will have credit in their own name, married women should ask creditors to report joint credit accounts under their full names and Social Security numbers.

Q: I plan to be married and to keep my maiden name. Should I notify the credit bureaus?

A: You only need to update your credit file if your name changes due to marriage or divorce. If you have a credit history under your maiden name and do not plan to change your name after marriage, there is no need to notify the credit agencies of your marriage. Any joint credit accounts that you establish with your future husband will be reported to the credit bureaus under both your names.

Q: I am getting a divorce. What should I do about our joint credit accounts?

A: If you legally separate or divorce, cancel joint accounts and apply for new ones under your own name. Notify your creditors in writing at that time that you are no longer responsible for any debts incurred by your ex-spouse. However, you will still be responsible for debts previously incurred.